My place of peace is my family - Chinese tax considerations in real estate inheritance

LABEL： Tax , Family wealth security and inheritance ,

For Chinese people who have moved back to their homes, houses are often regarded as a place to settle down. Real estate such as housing, which in turn constitutes the core property of many families, has attracted much attention. Faced with various modes of real estate inheritance such as transfer, gratuitous gift, and inheritance, inheritors and heirs inevitably feel lost and confused.

The transfer of real estate involves multiple taxes such as income tax, value-added tax and its surcharges, land value-added tax, deed tax, stamp duty, etc., and is accompanied by a series of tax preferential systems. Under different inheritance modes, there are great differences in their tax treatment, which usually constitutes the key to the choice of inheritance mode. Therefore, this article takes parents directly holding real estate and children as inheritors as an example to analyze the tax considerations of three inheritance models: real estate transfer, gratuitous gift, and inheritance, in order to help inheritors and heirs see the bright future.
1、 Pre requisite issue: Obtaining the qualification to purchase a house

According to the guidance of relevant macroeconomic policies on real estate, many places have issued local property purchase restrictions, which makes the qualification for purchasing a house the top priority when considering the inheritance of real estate. When inheriting real estate through the transfer and gratuitous gift model, it is usually required that the inheritor has the qualification to purchase the property in the location of the real estate. If they do not have the corresponding qualification to purchase the property, the transfer and gratuitous gift model may directly lose feasibility.

When the parents are Chinese nationals and hold domestic housing, while the children are foreign nationals, this issue will be more prominent. Overseas individuals working or studying within the country are allowed to purchase housing within the country, but are limited to purchasing only one unit for self occupation. Additionally, when purchasing housing in cities implementing housing purchase restrictions, they must comply with local policy regulations. Taking Beijing as an example, the qualification requirement for purchasing a house in Beijing is that "overseas individuals (excluding Hong Kong, Macao, Taiwan residents, and overseas Chinese) who work, study, and reside in China, as well as Hong Kong, Macao, Taiwan residents, and overseas Chinese who work, study, and reside in China, can purchase a set of housing for self occupation in this city" [3]. For children who have immigrated abroad, they may not be able to hold relevant proof of working within the country, and therefore cannot inherit related real estate through transfer and gratuitous gifts, and can only consider inheritance models.

In addition, according to existing relevant laws and regulations, notarization is no longer a necessary procedure for inheritance, gratuitous gift of property, etc. [4], but in practice, notarization procedures are still widely used in real estate inheritance to avoid disputes and other purposes. When using notarization procedures, the notary office will charge a fixed or certain percentage of the amount as notarization fees based on the type and value of the property subject matter.
2、 Value added tax considerations in real estate inheritance
（1） General Taxation Rules for Value Added Tax on Real Estate Inheritance

When children inherit real estate from their parents through inheritance and gratuitous gift models, they meet the legal conditions for exemption from value-added tax and do not have the obligation to pay value-added tax. When carrying out real estate inheritance through transfer mode, the general value-added tax rules for personal real estate transfer will apply.

The impact of value-added tax on real estate inheritance

           

In the above rules, the purchase period, location of the real estate, and type of real estate have a substantial impact on the enjoyment of value-added tax benefits for personal real estate transfers. In terms of purchase period, Shenzhen has further increased the purchase period eligible for value-added tax incentives from 2 years to 5 years on the basis of the above policies.

In terms of real estate types, in addition to distinguishing between residential and non residential areas, in order to reasonably guide housing construction and consumption, the State Council has further established the standard for ordinary housing that can enjoy preferential policies based on residential area plot ratio, single unit building area, and actual transaction price, and allowed each region to adjust the latter two standards appropriately according to actual conditions. At the same time, the actual transaction price is adjusted in a timely manner according to market fluctuations. Taking Beijing as an example, ordinary housing that will enjoy the above policy benefits in 2024 must also meet the following requirements: (1) the building plot ratio of residential communities must be 1.0 or above; (2) A single residential unit with a building area of 144 square meters or less; (3) The transaction price of housing within the 5th Ring Road is below 85000 yuan/square meter (inclusive), the transaction price of housing within the 5th and 6th Ring Road is below 65000 yuan/square meter (inclusive), and the transaction price of housing outside the 6th Ring Road is below 45000 yuan/square meter (inclusive).
（2） Consideration of Transfer Price and Tax Basis

Simply put, value-added tax is a tax levied on the value-added realized in the transfer process, which means that when choosing a real estate inheritance model, a comprehensive consideration should be given to both the inheritance and future external transfer processes. Based on the aforementioned taxation rules, the determination of transfer price is undoubtedly a key factor, which will directly affect the tax base of value-added tax. When children acquire real estate through inheritance or gratuitous gift, they will inherit the original tax base, while when inheriting real estate through transfer, a new tax base will be formed based on the transaction consideration. Therefore, when real estate is actually transferred to external parties in the future, there will be significant differences in the value added of real estate obtained through different methods.

Here, taking the cost of acquiring real estate by parents as 1 million yuan (excluding tax price, the same below), which is passed down to their children through inheritance, gratuitous gift, and transfer (assuming that parents transfer it to their children for 10 million yuan), and children transfer it to the outside world for 11 million yuan in the future after inheritance as an example, assuming that the corresponding exemption from value-added tax can be applied in the inheritance process, the comparison of value-added tax burden under various inheritance modes is as follows:

Comparison of VAT burden of different inheritance models

           

Therefore, when inheriting housing through transfer mode, a reasonable price setting may make it meet the standards of ordinary housing, and there is a possibility of enjoying value-added tax preferential policies. At the same time, a reasonable price setting can also correspondingly increase the tax base of the housing. If it does not meet the conditions of value-added tax exemption policy when it is transferred again in the future, it can also reduce the tax burden to a certain extent.
（3） Consideration of Value Added Tax Surcharge

The additional taxes and fees of value-added tax include urban construction tax, education surcharge, and local education surcharge. If value-added tax is generated in the inheritance of real estate, the corresponding calculation and payment of value-added tax and fees are also required. According to current policies and relevant interpretations, as natural persons do not register as general taxpayers of value-added tax, they can enjoy the tax preferential policy of halving the value-added tax surcharge for small-scale taxpayers [9], further reducing the tax burden of real estate inheritance.
3、 Personal income tax considerations in real estate inheritance
（1） General Taxation Rules for Personal Income Tax on Real Estate Inheritance

Similarly, when children inherit real estate from their parents through both inheritance and gratuitous gift models, they meet the legal requirements for exemption from personal income tax. When carrying out real estate inheritance through transfer mode, the general personal income tax rules for personal real estate transfer will apply.

The impact of personal income tax on real estate inheritance

           
（2） Interpretation of the "Five Only" Tax Exemption Policy

The definition of self use period and the only living room for the family is a key factor in determining whether it meets the "five only" tax exemption policy. 'Self use for more than 5 years' refers to the period from the purchase of a property by an individual to the transfer of the property for more than 5 years. It is worth noting that for properties acquired through inheritance or gratuitous gifts, when determining whether they meet the condition of' being the only one among five 'and thus exempt from personal income tax, the self use period can be claimed to continue to be calculated from the time the deceased or donor purchased the property. The 'only living house for a family' refers to taxpayers (or both spouses if they have spouses) who only own one house within the same province, autonomous region, or municipality directly under the central government. Whether they hold a non housing property is not considered in the scope of this tax exemption policy.

In addition, in terms of personal income tax, there will also be considerations related to the transfer price and tax base. On the one hand, if the personal income tax exemption regulations are applied when inheriting the property, but the exemption regulations cannot be applied when transferring it externally, the transfer model will have a significant advantage in improving the tax base. In the context of the above cases, the individual income tax burden of different inheritance models is compared as follows:

Comparison of individual income tax burden of different inheritance models

           
4、 Consideration of other taxes and fees
（1） Land value-added tax

In terms of the inheritance process of real estate, real estate inherited through inheritance or gratuitous gift is considered a legal situation where land value-added tax is not levied. In the transfer mode, individual sales of housing are temporarily exempt from land value-added tax. In addition, a progressive tax rate of 30% -60% should be applied to pay land value-added tax on the transfer income minus the deducted items.
（2） Deed tax

Deed tax shall be paid by the real estate transferee. There are significant differences in deed tax among various inheritance models. Under the inheritance mode, children inheriting their parents' real estate ownership still falls under the statutory circumstance of not levying deed tax. In the model of gratuitous gift, for individuals who donate real estate without compensation, the recipient is required to pay the full amount of deed tax. The tax basis is determined by the collection authority based on the market price of the house purchase and sale, and a deed tax rate of 3% -5% is applied. In the transfer mode, individuals who bear real estate are required to pay deed tax at a rate of 3% -5%. When they meet the relevant conditions of the first or second improved housing tax preferential policies, a preferential tax rate of 1% -2% will apply.
（3） Stamp duty

Stamp duty is a tax that both inheritors and heirs are required to pay. There are significant differences in stamp duty among various inheritance models. Under the inheritance and gratuitous gift models, the inheritance of real estate requires stamp duty at a rate of 0.05% based on the "property transfer document". The tax base will be determined and confirmed by the tax authorities based on market prices and other factors. In the transfer mode, the provision that individual sales or purchases of housing are temporarily exempt from stamp duty will apply. For non residential properties, the stamp duty on "property transfer documents" will also be levied at a rate of 0.05%.
conclusion

In addition, as of now, China has not yet levied inheritance tax or gift tax. If it is levied, it will have a significant tax impact on inheritance and gratuitous gift models. In this case, adopting transfer models or establishing real estate trusts can reduce related tax risks. Therefore, when considering the timing of inheritance and choosing the mode of real estate inheritance, this factor can also be appropriately taken into account.

It can be seen that the choice of real estate inheritance mode also needs to be "tailored to local conditions", and a certain inheritance mode is not always the best in all situations. The tax laws and regulations applicable to the inheritance of real estate vary depending on different modes, and according to the specific situation of real estate, it may also comply with relevant tax incentives to reduce tax burden. Therefore, the inheritance method of real estate should be analyzed based on the specific situation of the real estate location, purchase qualification, acquisition cost, property value, future use, etc., and combined with factors such as tax burden cost and notary fees to make a comprehensive decision.